Tiger Asia lost its final appeal on April 30 in its challenge on the jurisdiction of Hong Kong’s courts to hear this case under section 213 of the Securities and Futures Ordinance.
This has some market participants concerned about the potential severity of any sanctions and over the Securities and Futures Commission's growing use of section 213 in this and other cases.
The Court of Final Appeal's (CFA) decision opens the way for the SFC to seek to freeze the hedge fund's assets and impose the trading ban it had sought for alleged insider trading on Chinese bank shares by the US hedge fund. (Tiger has admitted to the charge in the US, but not in Hong Kong.)
The regulator had applied to the High Court in 2009 to freeze up to HK$29.9 million ($3.85 million) worth of assets of Tiger Asia. It then sought in 2010 to impose a trading ban and to freeze an additional HK$8.6 million in assets.
The hedge fund filed an appeal, eventually leading to the case being brought before the CFA.
The SFC is seeking a lifetime trading ban, says Sharon Nye, senior associate at law firm Hogan Lovells, which acted for the defence.
The judgement says it brings remedial action, she notes, but the nature of the proposed sanction means it is actually punitive in that Tiger Asia would be banned from trading in Hong Kong indefinitely.
Being banned from trading in an important jurisdiction can be difficult for an individual to explain to a prospective employer, adds Nye, but SFC case outcomes are particularly well-publicised, heightening the impact of any potential decision.
Meanwhile, one of the most contentious points of the case was Tiger Asia’s argument that the regulator had sought to bypass civil and criminal proceedings, instead opting to prosecute for insider trading under section 213 of Hong Kong’s SFO.
Section 213 gives the SFC a broad range of remedial powers where there has been, or appears to have been, a contravention of SFO rules. In Tiger Asia’s defence, it argues that section 213 can only be used in support of the dual enforcement regime, rather than as a standalone mechanism.
Others highlight the SFC’s use of section 213 in other recent cases.
For example, in June last year the regulator succeeded in forcing Hontex, a Chinese sports fabrics maker, to buy back shares from investors to the tune of HK$1.03 billion after the firm was accused of misleading investors in its IPO prospectus.
While it is the SFC’s place to punish market misconduct, its attempt to ‘right a wrong’ goes beyond its historical mandate of regulating market participants and publicly offered investment products to one that ensures favourable outcomes for investors, says Stuart Somer, director of compliance consultancy Complyport Hong Kong.
“The government’s proper role is enforcing the rules but not warranting a specific outcome for all participants,” he argues.
The collapse of Lehman Brothers in September 2008 ultimately led to big investor losses on 'minibond' products backed by derivatives linked to the US bank's debt and which were allegedly missold by some firms. The SFC succeeded in forcing certain firms that had sold them to repay a large proportion of investors' money back.
The SFC declined to comment, apart from to refer to the judgement handed down by Lord Hoffmann: “The SFC acts not as a prosecutor in the general public interest but as protector of the collective interests of the persons dealing in the market who have been injured by market misconduct.”